It is cash flow that constitutes the very engine of any business activity, yet it is an area with which even the most experienced entrepreneurs have had scratching their gorilla. The healthy management of the cash flow is not only about letting the business exist. It is about expansion and long term financial security of the organization. For the majority of business owners and those with entrepreneurial skills, in knowing the simple way to handle cash flow presents a prospect of success or failure. So how is it that so much importance is placed on it, and how can you enhance such an experience to handle cash flow like a normal?
This article will discuss the basic strategies used to control cash flow and how to do so from a psychological standpoint, and hopefully provide guidelines to manage your cash flow prudently. You are an entrepreneur or a follower of psychology, this guide will help you to take better control over the financial well-being of your business.
Don’t let another day pass by without taking control of your finances!
The Behavioral Correlation between Cash Flow and Business Performance
Cash flow problem is not merely a financial frame of reference; there also exists a psychological component. Stress, anxiety and decision fatigue are some of the implications of poor cash flow for the business owner. In stark contrast, a business with cash flow in control exudes assurance, concentration, and positivity. Behavioral economics indicates that if people have a clean slate, with their financial issues under control, then their decision-making capabilities regarding the business will be better. With good cash flow management, you will remain calm under pressure, avoid making decisions based on emotions, and stop making rash moves.
Practical Advice: Assessment of the current situation also involves an understanding of the mindset before formulating cash flow related measures. To what extent are your financial fears determining your business operation? Try to understand the reason, they can be rationalized, and find reasonable solutions to tackle them.
Cash Flow Explained: Money In VS Money Out
Basically, cash flow management is earned when there is a compromise between money earned from inward cash inflow collections, plus cash inflow through paying out expenses or cash outflow. Revenue inflows can be through sales, investment or loans while cash outflows pay out expenses like rent, salaries, and stock.
A positive cash flow occurs whenever the funds available to a business are higher than the funds utilized in workflow processes. Whereas, negative cash flow indicates a situation whereby you are the one paying out a lot more than you are making in return- leading one to either seeking alternative means of resolution or getting into a debt mess.
Illustration: A budget may end with great new contracts for a graphic designer who works on a freelance basis, however payments trickle in at a snail’s place. At the same time, however, they have immediate outflows, for example software licenses and utilities. Aside from sales, managing the dichotomy between what is received and made is the key element in achieving a stable financial standing.
Actionable Cash Flow Management Strategies
Once you have appreciated the relevancy of cash flow, let us move to cash flow management that is cash centered.
Create Cash Flow Projections
The primary action to taking full management of cash flow is by making cash flow forecasting. This is where one tries to forecast a net surplus or net deficit of cash inflows and cash outflows of a given period (usually on a monthly or quarterly report). Projections are also helpful in case of general reasons like planning cash for particular expenditures. Here’s what this is all about it is preparing a cash flow map telling how much will be the cash inflow in the program or when cash outflow will be stabilized.
Actionable Tip: In cash collection management and forecasting, employ cash collection management and forecasting insights with other tools or software to improve the management of receivables collection. You lost paper cuts by combining these forecasts with your daily activities and did not have to worry about any disappointments.
Accelerate Inflows by Offering Incentives
There is a common way of improving the cash flow and that is speeding up the cash inflows. This can be achieved by instituting early payment discounts for quick bill payment, customers receiving discounts more so invoice settling quicker. This minimizes the time taken to raise an invoice and the time taken to pay improving the liquidity position.
Example: A consultant attaches a 5% discount to the fee and the clients pays within 10 days instead of the 30 day period offered previously. This creates a motivation that clients should pay their debts within a shorter period than it was before.
Actionable Tip: Establish payment conditions for your clients at the beginning of the business. Consider automating invoice creation and reminder letters which will assist in timely payment for services by clients.
Negotiate Longer Payment Terms for Outflows
Just as you want to speed up inflows, it is also, sometimes feasible to slow down your outflows. By making such moves to your suppliers such as longer payables instead of a cash pay you get to preserve your cash longer. This form of economy can act as a cushion, allowing you to pay for some pressing bills such as employee salaries and rents sooner rather than later.
Example: The small enterprise comes to an arrangement with their suppliers where payments are made after a period of sixty days as opposed to the usual thirty days. This allows the business to arrange its sale of stocks to raise money within the required time.
Psychological Insight: Longer terms of payment are rarely overridden if such payment terms can be positively fashioned in this manner. Stress on how this flexibility assists to promote the business partnership and assist with future undertaking.
Keep Business Finance Separate from Personal Finance
This is a common error that a large number of small business proprietors tend to make that is they do not keep the business finances separate from their personal finances. This can cause overstatement or understatement in the accurate estimate of cash flow. Combination of personal expenses and business costs may result in the obscuring of projection of business risk necessary for proper decision making.
Actionable Tip: For instance apply the use of a business bank account while counting only business related transactions and apply appropriate business management software. This organization will also be due to proper bookkeeping since tracking cash flow will also be done in a more efficient manner.
Bump up your Liquid Fund
There will be times when an unwanted financial emergency arises and during those times you will be thankful you have a cash reserve to keep you from taking expensive loans or cutting some important expenses due to lack of cash flow. Every month, create an opportunity reserve that will help you run your operations for a minimum of three to six months’ worth of operating expenses by putting aside a portion of your profits.
For example: A particular tech startup puts aside 10% of its monthly revenue in what it calls an emergency fund. Such that, should a project get behind schedule, the company does not freak out as it is able to sustain its operational needs without borrowing at exorbitant rates.
Psychological Insight: It has been suggested by Prospect Theory that a loss is more severe than a gain is of equal value. A cash reserve acts as a buffer to any onslaught of losses to business owners providing them with tranquillity and an opportunity to take risks that they would otherwise avoid.
Reassess and Eliminate Any Non-Essential Expenditures
You may want to think hard about your business expenses. Is there any expenditure that can be avoided or for which the internal expenses can be reduced? At times some businesses sign up for some services or tools and never use them. Given such circumstances it is advisable to assess these costs on a regular basis in order to eliminate them and redeploy that cash to more essential areas.
Actionable Tip: Analyze finances from time to time in order to see where money is being wasted. Get rid of any services you do not use subscriptions, and try to cut costs wherever possible. Whenever cash flow is saved, this cash flow should be reinvested into other more important aspects of the business.
Don’t let another day pass by without taking control of your finances!
Lease instead of buying.
(Kahanda Nyicha): Imagine purchasing massive laptops, expensive computers, equipment, or even office space. All these potential costs can, however, be avoided by leasing or opting for rentals. This lowers your initial costs and allows a more basic flexibility of cash flow. Assets are usually viewed as assets in a more permanent plane. This as such should take longer to achieve. Leasing on the other hand offers the growth you require ready terms for the same.
Example: Rather than purchase professional high-end cameras, a small photo studio opts to lease them instead in order to keep more funds for marketing and client acquisition, which grows the business faster.
Psychological Insight: Business owners might face the endowment effect, which makes people overvalue the acquired things they may cause the business owners to feel the need to purchase and/or own instead of leasing. This is a cognitive bias which knowing can assist alleviate more irrational financial decisions that do not favor cash flow better.
Conclusion: Cash Flow Management is the Key to Success
The success of any business depends on how efficiently there is cash flow management. Proper understanding of the aspects of how people make decisions with money along with employing rational cash flow methods safeguards the business from downfall and stress associated with cash shortages. Planning for your finances or speeding up the collection of accounts receivables and sales, controlling your expenditures and accumulating cash reserves are all preemptive measures for making certain that the business survives and flourishes.
Apply these few adjustments into your daily finances and within no time, you will be a whirlwind in cash flow management. The outcome? Stress relief, easy decision-making, and a business that is ready for growth.
Frequently asked questions (FAQ)
Why is cash flow management important?
For the operation of a business, cash flow management states simply is the process that ensures that enough liquidity to meet the operational needs of the business is available at any point of time. This reduces chances of not meeting cash obligations and ensures that the business is viable in the long-run.
What is the difference between profit and cash flow?
Profit is the benefit that remains when all the related operational expenses have been cleared while cash flow specializes in cash coming in and out of the business. A business can be operating at a profit but can still have problems in cash flow if receivables are not paid on time.
How can I improve my cash flow quickest?
In order to improve cash flow quickly, offer discounts for early payment, strengthen the tendencies of suppliers for terms renegotiation or seek to restrict excessive spending.
What tools can I use to track cash flow?
There are numerous cash flow management tools, such as QuickBooks, Wave, Xero, among others, which can eliminate tedious calculations and give useful information on the state of cash flow.
What should I consider when writing cash flow forecast?
Cash flow forecasts should typically contain a summary of all estimated inflows(e.g sales, investments) as well als all outflows (rent, salaries, utilities) planned for a determined period, most commonly done on a monthly or quarterly basis.
This article contains affiliate links, if you make a purchase I will make a small commission.
0 comments
Post a Comment